Annuity Rates Fall to New Record Low
Annuity rates – which determine the retirement income of millions of pension savers – have fallen to their lowest ever level and they could be pushed lower still, perhaps by as much as 20pc, by new EU rules.
An annuity works on the assumption that the pensioner will live for 20 years, so a £100,000 pot would produce £5,000 per annum, plus interest. The amounts that are received by a man retiring at 65, with a £100,000 pot were £7,157 in early 2010. This fell to £6,426 at the beginning of 2012 and down to £6,188 by May.
The amount of interest is determined, on the whole, by the rate of gilts, which have just reached their lowest since records began in 1703. This has been seriously affected by the Eurozone crisis.
However, it is important to consider other factors. There are 3 key indicators that you have to consider, whether or not you smoke, take prescription drugs or have had a hospital stay in the last few months. All of these are indicators that the annuity firms will take into consideration when assessing how much income you get. If any of these are likely to reduce your anticipated lifespan, the annual amount you will receive from tour pot will increase by 10 or 20%.
The yields on gilts, or British Government Bonds, keep getting lower as a result of the financial crisis.
Unfortunately, annuity rates could be pushed even lower when new EU rules on solvency come into force in 2014. At an annuity rate of 5pc, a 65-year-old man who lives for the average 20 years will receive zero interest – his capital will simply be returned to him at the rate of £5,000 a year.
So do you wait to see if things get better or jump in now in case they get worse? There is no right or wrong answer to that but getting advice from an Independent Financial Adviser would be worth the investment at this crucial stage.